The US Economy: July Isn't Looking Any Better

Next week the Bureau of Economic Analysis will release its estimate of Q2 US GDP growth. Of 69 economists polled, the bloomberg consensus is that the US economy grew at a 1.8% annualized rate spanning the months of April to June over January to March. In all, this quarterly growth rate implies just 1.9% annualized growth during the first half of 2011. Not much of an expansion. Economists have put their 'hope' into the second half of 2011. But high frequency data show that the third quarter is setting up to be a doozy as well. This is too bad because we're talking about jobs and the welfare of American families here. I like to follow two weekly indicators to get a feel for the labor market and the corporate trucking business. The message is clear: the economy is not improving.

First, the bellwether of the state of the US labor market - weekly initial unemployment claims - continues to disappoint. In the week ending July 16, seasonally adjusted initial claims increased 10,000 to 408,000. The 4-week moving average was 421,250, which is just 19,000 below its May peak of 440,250. This week's report fell on the BLS' survey week, so the July employment report is likely to be another weak one (weak is of course a euphemism for the June report). The chart below illustrates the annual growth rate of the non-seasonally adjusted 4-week moving average of initial unemployment claims. I use this for comparison to the second series, diesel consumption, which is not seasonally adjusted. I include the recession bars for association with the business cycle. Claims really are more of a coincident indicator - but the frequency is helpful for gauging the state of the real economy.

The weekly claims are not indicating a recession - they are contracting on an annual basis. However, the contraction in claims is slowing, -8.4% Y/Y, which is much slower than the average -13% annual drop in claims during the first quarter of 2011. Unless claims start to fall more precipitously, the labor market will continue to be stuck in neutral - not good. Second, the US Energy Information Administration releases weekly estimates of distillate fuel oil supplied to the end user in thousands of barrels per day (real). This is important because roughly 90% of this number is comprised of diesel fuel. Given that diesel fuel is a primary input to construction and commercial and industrial trucking, the weekly series serves as a high-frequency indicator of domestic demand for goods that are transported across the country. There are seasonalities to this data , but the message is clear: demand for diesel fuel suggests that wholesale demand is inherently weakening. Unlike diesel prices, which can be impacted by number of factors including taxes, refining capacity, and most recently by IEA's petroleum release, consumption measures absolute demand. The chart below illustrates the same representation of demand for distillate fuel (primarily diesel) as the annual growth rate of the 4-week moving average. The latest data point is July 15. The annual decline was a bit less severe in the week of July 15 - but this series is quite a bit more volatile, and the downward trend in fuel consumption has been established.

As of last week, these two high frequency indicators demonstrate no marked improvement in domestic demand through July. Rebecca Wilder